Dollar peg 'stronger' after Bin Laden comments

By

Agencies

PublishedSunday, December 30, 2007

(REUTERS)

Gulf Arab oil producers may be less likely to drop their currency pegs to the weak U.S. dollar after Al Qaeda leader Osama bin Laden criticised dollar pegs as "unjust and arbitrary", economists said on Sunday.

The Saudi-born militant leader urged Muslims in a video recording on Saturday to support militants so they can "preserve your oil and wealth and protect your money that is slipping between your fingers due to the unjust and arbitrary dollar pegs."

Saudi Arabia and four other Gulf countries have insisted on their commitment to maintaining pegs to the dollar, which hit all-time lows versus the euro and a basket of major currencies last month.

"Comments like this will make their commitment to the peg even stronger and it will be even harder for them to move away from the dollar," said Marios Maratheftis, regional head of research at Standard Chartered Bank.

"They don't want this to become more of a political topic than it already is."

Annual inflation in Saudi Arabia, which has not changed the riyal's rate against the dollar since 1986, hit 5.35 percent in October, the highest since at least 1995.

Its smaller neighbours, including Qatar and the United Arab Emirates, are concerned the weaker dollar is eroding savings of expatriates, who dominate their workforce, and hampering their central banks in the fight against inflation.

Price rises in Qatar are just off a record 15 per cent and inflation in the UAE hit a 19-year high of 9.3 per cent last year.

The UAE dirham hit a 17-year high last month after Central Bank Governor Sultan Nasser al-Suweidi said he was under mounting social and economic pressure to sever the dirham's peg and track a currency basket.

Suweidi backtracked on his remarks after Gulf rulers agreed at a summit in Qatar this month to retain dollar pegs and keep any talks on currency reform secret.

KUWAIT DROPS PEG

Kuwait broke ranks with its neighbours and dropped its dollar peg in May, saying dollar weakness was driving up imported inflation by making some imports more expensive.

The Middle East's fourth-largest oil exporter has allowed the dinar to rise almost 6 per cent since adopting a currency basket on May 20 comprised mainly of dollars.

Despite growing pressure to do the same, Gulf countries could have less political will to follow for fear of appearing to be yielding to pressure from bin Laden, said a Gulf-based economist, who did not want to be identified.

"Bin Laden's comments do make it less likely that Gulf countries will move away from their pegs," the economist said.

Dollar pegs force Gulf countries to track U.S. monetary policy at a time when the Fed is cutting rates to contain the fallout of a mortgage crisis.

A group of Saudi clerics issued a rare warning earlier this month to Saudi leaders that they must take action to curb rising inflation, which has prompted public anger.